"Clumsy" Commercial Liability Insurer Did Not Commit Bad Faith

The Martinellis filed an arbitration claim against Dan Paulson Construction for alleged construction defects. Paulson's insurer, Mutual of Enumclaw (MOE), agreed to defend under a reservation of rights. Before arbitration commenced, MOE filed a declaratory judgment action. MOE suspected that Paulson would seek an undifferentiated lump sum award in arbitration, depriving MOE of the information it would need to determine which portions of the damage award, if any, were for covered claims. Thus, it issued interrogatories and a subpoena duces tecum to the arbitrator for such information. Paulson and the Martinellis settled, with Paulson assigning its coverage and bad faith claims against MOE to the Martinellis. They alleged that MOE's discovery and ex parte cover letter to the arbitrator constituted bad faith. The trial court agreed and ordered MOE to provide coverage by estoppel.

The court of appeals reversed, holding that MOE's actions did not amount to bad faith because MOE faced "unreasonable options": risking a bad faith claim by litigating coverage issues before arbitration or paying the entire settlement or award regardless of whether it was based on covered claims. On MOE's discovery requests to the arbitrator, the court held: "This tactic, while somewhat clumsy, did not amount to bad faith."